Q4 GDP numbers a positive surprise with growth coming in at 4.1%

The provisional estimates for FY22 have come at the surprising end of the spectrum, with real GDP growth of 8.7 per cent for the full year. This revision was rather marginal on the downside. There were almost minimal data revisions in Q1, Q2 and Q3 of FY22.  For FY22, real GDP has been revised downwards by Rs 36,000 crore to Rs 147 trillion, according to the first advanced estimates released in early February 2022, of which Rs 27,000 crore is in Q4 alone.

The Q4 GDP numbers were a positive surprise with growth coming in at 4.1 per cent, though it was lower than the earlier Central Statistics Office (CSO) projection of 4.8 per cent. The surprise package for FY22 was the construction sector, which logged in a much higher growth rate of 11.5 per cent, as against the CSO projections of 10 per cent. In fact, a revival in construction activity looks evident from Q3 FY22 onwards, according to the CSO print.  The GVA growth for the corresponding period stands at 3.9 per cent. In Q4 FY22, real GDP growth is 6.7 per cent QoQ, however, the seasonally adjusted real GDP growth is only 0.7 per cent, showing only a modest improvement over the past quarter and a loss of growth momentum.

The main observation from the current release is that most sectors, barring trade, hotels, transport, communication & services have attained their pre-pandemic level (pre-pandemic defined as the level in March FY20). The FY22 absolute numbers (at constant prices) of this sector are at 89 per cent of the pre-pandemic level (i.e. FY20), of which 28 per cent of the recovery was witnessed in Q4 (and 23 per cent in Q3). This indicates there was a revenge increase in hospitality and travel spends beginning Q3. Despite such a rapid increase, the trade sector is still Rs 3.04 trillion lower than the FY19 levels. We believe at this rate, by Q1 FY23 this sector will reach/cross the pre-pandemic level. On the positive side, even in this lagging sector, the Q4 figure has surpassed the pre-pandemic figure of Q4 FY20.

Thus, in general, the economy has improved its vitals since the last reading, but future trajectory may still have to face the uncertainty of higher input and product prices and consumer demand adjusting accordingly. On the specifics, from the supply side, agriculture has performed better than expected and has cushioned the otherwise general expectation of a large decline in output in Q4. The surprise element is the contraction in manufacturing at 0.2 per cent, which should have responded positively to traction in rural demand. As discussed, the continued traction in the construction sector largely reflects the significant budgetary push to capital formation, which has started to pay dividends.
 

Despite the general rise under all heads, the demand side remains a work in progress. This is even when private consumption has increased for the entire year. Private final consumption expenditure (PFCE) grew by 7.9 per cent in FY22 as compared to a contraction in FY21. However, if we look at the Q4 growth in PFCE, it has revealed a much lower growth rate at 1.8 per cent, and it shows a continuous decline onwards from Q1FY22.  This is largely because the services growth remains weak.

The demand creating sectors such as construction and trade must show a tangible run. A sharp rise in the share of valuables at 1.7 per cent also indicates postponement of current consumption and leakage of financial savings towards precious metals. This trend also does not augur well from the point of view of financing growth and fiscal deficit.

The gross capital formation remains the only silver lining on the demand side. The share of capital formation has risen to 30.5 per cent. However, with rising input prices, the sustainability of this recovery needs to be watched.  

On the trade side, both exports and imports have surpassed the pre-Covid level but the cushion of a positive current account deficit (CAD) in FY21 is no more available in FY22, implying the net exports component will drag the GDP down this year.

The implicit inflation in FY22 works out at 10 per cent, with the nominal GDP growth at 19.5 per cent. Growth in GDP deflator for agriculture has increased to 10.7 per cent YoY compared to 6.9 per cent YoY in Q3, indicating the impact of higher food prices. For industry and services, the growth in deflator has moderated in Q4 but it is still on the higher side. Such broad-based entrenched inflation does not auger well for the demand side. Further, given the variation in consumption across income deciles, demand is expected to remain sombre against the backdrop of rising inflation.

Overall, the diagnosis of the economy on the domestic front is that the output is still below the potential level and is facing high inflationary pressures. The consumption recovery is not broad-based. The revival of investment demand holds the key to overall recovery, consumption demand and eventually GST collections.

We however end on a positive note. The provisional data of all scheduled commercial banks (ASCBs) for the fortnight ending May 6, 2022 indicates a Rs 1.5 trillion growth in credit and Rs 2.30 trillion growth in deposits growth. This is the first time in the last 5 years that during the first three fortnights credit growth has remained positive, which usually remains negative in the first few fortnights. The interesting point is personal loans contributed 89 per cent of the incremental credit in April 2022. Does this indicate consumers trying to beat the forthcoming interest rate hikes by preponing their loan decisions?

The writer is group chief economic advisor, State Bank of India. Views are personal